International Tax Advisory: Taking a Gap Year: Delayed U.S. CbC Reporting Creates Hassle for U.S. Multinationals

Action 13 of the Organisation for Economic Co-operation and Development’s (OECD) final base erosion and profit-shifting (BEPS) report suggested the adoption of a standardized mechanism for transfer-pricing reporting. Per the BEPS report, large multinationals should be required to produce (1) a master file about global business operations and pricing policies available to relevant jurisdictions; (2) a local file, specific to each country, disclosing materially related party transactions and transfer-pricing analyses; and (3) an annual country-by-country (CbC) report of financial results in each jurisdiction with a rundown of group entities and their activities.

While the master and local files would be filed directly with relevant local jurisdictions, the CbC report would be filed in the tax residence jurisdiction of the ultimate parent and subsequently shared via tax information exchange or similar agreements. The OECD recommended that jurisdictions implement these reporting requirements for fiscal years beginning on or after January 1, 2016.

The U.S., though broadly encouraging of the BEPS project, has been cautious in adopting specific recommendations. The IRS and Treasury issued proposed regulations on CbC reporting on December 21, 2015. While the proposed rules generally conformed to the OECD recommendations, there were some key differences—including timing. Under the proposed regulations, CbC reporting for parents of U.S. multinationals would not begin until after the date the regulations are finalized. Assuming the rules are finalized by June 30 as expected, calendar year U.S. multinationals would not be required to file the CbC report until sometime in 2018 for the 2017 tax year. Thus, 2016 becomes a “gap year” for CbC reporting.

This gap year causes administrative headaches for U.S. multinationals because foreign jurisdictions may be empowered to obtain CbC reports from local affiliates (the “secondary mechanism”) rather than through information exchange with the parent’s jurisdiction (the “primary mechanism”). In other words, U.S. multinationals may effectively be required to file CbC reports directly with various foreign countries. Commentators have expressed concerns that information that U.S. entities report directly to foreign jurisdictions may not receive the same level of confidentiality protection as if the filings were made to the U.S. tax authorities (and then exchanged pursuant to bilateral agreements). Moreover, filing various CbC reports directly with foreign authorities means complying with a web of distinct obligations under the applicable foreign laws. The secondary mechanism for CbC reporting therefore increases compliance costs and seemingly undermines the consistency and transparency the CbC regime is intended to foster.

So far, the IRS and Treasury have indicated that the finalized CbC regulations would maintain the same timeline as described in the proposed regulations, including tying CbC reporting to the tax return due date (and not end of the following year as the OECD had suggested). In addition, Treasury officials have said the final rules are not expected to incorporate provisions for optional, earlier CbC reporting by U.S. multinationals. Even if optional reporting were permitted, it is not clear that such reporting would satisfy foreign laws implementing BEPS Action 13. Nevertheless, the U.S. tax authorities have supposedly been asking other jurisdictions if they would accept such early, optional reports. However the issue is ultimately resolved, the smart U.S. multinational will prepare a CbC report for 2016 anyway, if only to facilitate any reporting under foreign law by local affiliates.

This advisory is published by Alston & Bird LLP’s International Tax practice area to provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under court rules of certain jurisdictions.